Bank of Canada Policy Deemed Appropriate and Left Unchanged

September 4, 2013

It’s been three years since the last change in Canada’s overnight rate target of 1.0%, which was raised by 25 basis at each of three successive Bank of Canada policy meetings in June, July and September 2010.  That status quo will now enter a fourth year after officials again agreed not to change their policy stance.  A statement today called inflation, which is running below target, subdued and inflation expectations well-anchored.  The statement argues that “uncertain global economic conditions appear to be delaying the anticipated rotation of demand in Canada towards exports and investment.” Slower household credit growth is mentioned, and the statement concedes that recent economic data on the whole have been “choppy.”  Real GDP growth slowed from 2.2% at an annualized rate between 4Q12 and 1Q13 to 1.7% last quarter, and the four-quarter comparison was marginally less than 1.5%.  Officials no longer expect Canada’s output gap to begin narrowing before 2014, which suggests that the likely date for a restoration of full employment may again be pushed back.  The target date was moved last January from end-2013 to the second half of 2014 and then to the middle of 2015 this past April.  Whenever the target date is pushed back, it means that officials can afford to wait longer before resuming the normalization of their interest rate structure. 

As long as there is significant slack in the Canadian economy, the inflation outlook remains muted, and imbalances in the household sector continue to evolve constructively, the considerable monetary policy stimulus currently in place will remain appropriate. Over time, as the normalization of these conditions unfolds, a gradual normalization of policy interest rates can also be expected, consistent with achieving the 2 per cent inflation target.

October’s policy announcement will occur on the 23rd and be accompanied by an update of the Bank’s outlook for the economy and inflation.

Copyright 2013, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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